Thomas Wollman, Assistant Professor of Economics
Summary: In many industries, startups drive product innovation but cannot produce and market large quantities as cheaply as established firms. Thus, established firms find it profitable to acquire the set of startups that face high demand at low prices. In cases like the $170 billion non‐alcoholic domestic beverage industry, this innovate‐and‐be‐acquired cycle accounts for virtually all successful new product introductions. However, entrepreneurs often have private information about the type of demand their startup’s products face. When price is unobservable due to, for example, poor reporting, entrepreneurs find it difficult to communicate this information in a straightforward way. In this paper, I show how entrepreneurs can use pricing and advertising to send a costly signal to potential acquirers and reveal their type of demand. Then, using an original dataset that combines retail scanner data with a list of recent mergers and acquisitions in the consumer products industry, I will explore whether the data is consistent with this behavior. I will test whether startup firms that are acquired cut price, increase advertising, and consequently increase quantity in the period leading up to the acquisition announcement. I will also test whether, following the announcement, they cease or reverse this behavior.